Debt and its Administration

If there are to be public agencies involved in capital formation, they need to have some method by which corruption can be avoided. Perhaps there is only one.

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In a different post, debt was debunked as an important consideration in economics. It is just one of many accounting rules that affects, along with the others, what the distribution of the products of a society is. Debt may have an interesting history, but that does not make it special in the bin of things that affect distributions. Why it is singled out for such prominence does not appear to be obvious.

Like every other transaction, debt is a two-sided one. Some access to society’s products is transferred from one individual to another when some new instance of debt is thrown into the accounting mix. In other words, some products, perhaps unspecified, are transferred from one individual to another. Since society is composed of individuals, they are the only consumers of products in the final analysis. Groups of individuals can be given many different names, and then the group can be the recipient, but the group’s allocation is transferred further to its members, according to whatever rule the group has chosen to use. The ramifications of some group’s ownership of rights to some of society’s products can be onerous to list, involving contingencies, inheritances, rights of refusal, and anything else clever people can think up. These do not need to be considered in the overview of a new economic theory. The point is simply that there are products and individuals to whom they will be distributed.

One of these groups can be a nation, meaning some geographic body of land, and all those who have rights to some products owing to the nation. Those who have rights is a group which is figured out by those who have rights to do so, and these typically are the same thing. In other words, it is a circular loop. Citizens, if we use that term to represent the individuals with claims to the products of this particular piece of land, determine in one way or another, their own membership in the group. Again, clever people can think up all types of ways to make such a membership complicated, but again, it is of no consequence to the creation of a novel economic theory. Most groups have some rules by which existing membership controls new membership, so nations or other blocks of land are not much different from other types of groups. The labels for membership are different, but the concept of membership is simply that.

Debt is a transfer of some particular formulation of product access rights from one individual to another individual, or perhaps groups of individuals on either side of the transaction. It is a curious thing that when the groups are large, like nations, or with obscured membership, like banks, there are statistical lists of the amount of debt granted. Likewise, for individuals and most groups, there are lists of debts owed that can be accessed under some conditions. The other side of the picture is not so transparent. Individuals who have granted debts to others do not have this publicly listed and available to anyone wishing to enter into a transaction with them. Thus it is hard to know what the average creditor has for debt. This means that while some statistics are available on debts owed, there are less on debts owned. Although this may be curious, it does not affect any development of an economic theory.

One aspect of debt that may differ from some other rules is the clear specification of timing of transfers. All transfers have some timing requirements, for example, taxes need to be paid by some deadline. Debt has deadlines for making some payments that can be more extended than others. This has use for some business arrangements, and for some personal situations.

An economic theory needs to cover capital formation, motivation, efficiency and productivity, and distribution arrangements. There can be no debt granted if there has not already been some capital formation. Capital formation comes from distribution arrangements. If some individual or group has not been granted an excess of society’s products, they will not have the capital to grant a debt. So, prior to the institution of debt, there has to be some arrangements for some individuals or groups to accumulate more than an equal share of society’s products, or else some individual or group has to reduce their consumption below what their allocation is, and thus save some capital. This is the heart of capital formation: some individuals or groups must consume less than they are allocated, either by them receiving an excess of their consumption rate, or by them reducing their consumption rate below the allocation rate.

Debt is granted for charitable causes, to assist some individuals or groups, or for profitable causes, so that the grantor can in the future possess even more of an excess of goods over his consumption rate. This latter situation is one of the positive feedback loops that leads to ever-increasing disparity in the distribution of society’s products. Determining how to adjust these loops so that the goals of maintaining and improving motivation and efficiency is a principal goal of any economic theory. One way, no limits at all, has been experimentally tried for a few centuries and it leads to extreme disparity which stifles both motivation and efficiency, as well as undermining the stability of whatever social arrangements were used to support this process. Another way has been tried for a few decades in a large arrangement, and in small situations for much longer, and that is to abolish it. This leads to shortage of capital formation, as well as eventual motivation disarray. So it is clear that some middle way is necessary.

Middle ways have been tried, and they can only be tried when some governance exist with the power to overrule any arrangements made between individuals and groups, so as to further efficiency, motivation, and capital formation. This typically proves to be unstable, as the governance tends to be corrupted as disparity grows, which is exactly where it should be uncorrupted and working to regulate it. This, of course, is the second famous positive feedback loop, which involves more corruption of government when disparity increases, and the corruption tends to increase disparity even more.

These obvious and well-known points indicate that economics and politics cannot be treated separately in a theory. Thus, an economic theory must be as well a political theory. Exactly what a political theory would include is not clear. One aspect is capital formation, just as the economic theory must include it. Capital formation can occur as part of the first positive feedback loop, where debt is used to increase disparity, or as part of the second positive feedback loop, where political corruption is used to increase disparity. However, it is not necessary for there to be large disparity for capital formation, if the political theory side contains some feature which will make it work. Note that capital formation is not solely the accumulation of capital, but also its use, meaning its allocation and management.

Corruption is possible on the part of whoever is in charge of capital collection and allocation within a governance agency involved with capital. Corruption means simply that some individual has two agendas, one being the agenda of his position, which is to improve the productivity of society by allocating capital under some rules for its return, in other words, debt, and the other being a personal agenda, which is to improve his own position, the position of some others that he favors, or some group that he is a part of. If a political theory is to be created, it must cover how to deal with this most common situation, of the administrator of capital with dual agendas.

Some obvious alternatives for the management of the administration of capital and debt are to have multiple individuals involved, to have watchdogs monitoring the behavior of those individuals, public scrutiny of those individuals, transparency of the personal situations of those individuals, clear and strict regulation on how such individuals are to make their choices, and others. Each of these is also subject to corruption, and it is certainly possible to conceive of a whole league of the corrupt, each aiding and abetting the others in the concealment of it. For every device that is used to prevent corruption, there is a counter to it, involving yet more corruption. Since corruption was or is rampant in most societies, historical and current, there is no clear miracle cure for it. One thing is clear, however, corruption takes time to install itself in any administrative organization. If there were regulations stating that those involved had something like term limits, or were subject to some periodic review or vote to stay in the position, then this might be another defense against corruption.

One idea might be universal term limits for anyone in a position where corruption might be an issue. Term limits are typically despised by individuals involved in some administrative position, as climbing to a high level in an administrative hierarchy takes a long time, as does becoming efficient at the position, as does finding and training good subordinates, as does many other miscellaneous tasks. However, term limits is the only solid defense against corruption, provided it is close to universal.

Inverting Caveat Emptor

Caveat emptor has some lingering support in our modern times, but perhaps it should completely be replaced by something more appropriate.

Caveat Emptor is the latin phrase meaning ‘buyer beware’. It is supposed to somehow be crucial for a free and open market to exist. All it means is that deception is allowed in market transactions, and it is the buyer’s responsibility to ferret it out and then make transactions based on valid information. It may have been very well suited to the early market economies of Adam Smith’s time, but perhaps it is not very well suited for our times.

In olden times, there wasn’t much that could be done, other than warn buyers by having them repeat this mantra. In some cases of deliberate fraud, blatant and obvious, some council of respected individuals might do something against the dishonest seller, if he/she had not already left the market and disappeared. On the other hand, they might just look at the seller and repeat: ‘Caveat emptor’, meaning it was his fault for not verifying the claims of the seller.

For most transactions, there was little option for dishonesty. A bag of corn could be weighed, so that the weight could not be faked. The corn itself could be inspected for spoilage. What else could go wrong? There were some transactions on olden days that might be counterfeited, such as coins. A scrupulous buyer might insist on a density check for gold or silver. Sometimes these checks might not be available.

Animals which were sick could be inspected, or left in a pasture for a day or so to observe their behavior. Pots could be tapped to search for imperfections. Fabric can be laid out in the sun to see its size and quality. Caveat emptor actually worked fairly well in these situations.

Services were usually done by local people, whose workmanship was known widely. It may have been excellent or mediocre, but asking others in the neighborhood about the workman involved would tell you which of these you might be getting. When ancient economists started theorizing about trade and the improvement of efficiency that arises from the specialization of labor, they were living in times or not long after times when these processes worked well. Thus, the very simple theories that were proposed were accurate for the times they were embedded in.

Skip forward to modern times. There is a weird tradition in English jurisprudence that says that precedent is everything. It’s not a common practice in most other countries, but in the English colonies it holds forth. Perhaps that tradition spills over into other areas. Economic theories that were appropriate for times centuries ago are still looked on as having validity in the extremely different world we live in. Why would that be? Perhaps the explanation is as much psychological as theoretical. A number of explanations can be hypothesized, such as each generation learning these theories from the prior generation, who held respected positions. No questioning was permitted. Thus, from one generation to the next, theories from long ago are memorized and accepted, and the task for economists is to justify them. Certainly, other hypotheses as to why antique economic theories are still propounded today, almost without dissection, can be postulated. It doesn’t matter what the justification for these theories is, only that they might no longer have any shred of utility or validity.

In today’s markets, various items are bought to complete each individual’s or each household’s quorum of things to own. Everybody has a residence, which has to have various components, such as a place to cook, a toilet, a place to clean oneself, and others. Everybody has a mode of transportation, such as a car or a bicycle. Everybody has a communication device, such as a telephone. Each of these things has various grades, and individuals and households work or do other actions to try and maintain their items or to upgrade them. Individuals and households in declining situations have to figure out how to cope with their decline as they slip down in the gradation of items owned or rented.

There are strong laws in some jurisdictions relating to transactions with these items, but the regulations for this are far from uniform, either geographically or by category of item. Take for example, residences. For purchased residences, there might be laws stating exactly what information about a residence has to be provided to the purchaser, and by exclusion, what does not have to be. There are other sets of regulations about the condition of the residence in order for it to be allowed to be sold. As an example of the former, information about property lines and easements has to be provided, and if they are not or are provided with errors, the sale can be rendered void and all monies returned to the proposed purchaser. Different jurisdictions might require other information to be provided related to the condition of the property. As an example of the latter, houses cannot be sold for occupancy if they are in unsanitary condition, contain dangerous elements in the electrical parts, and so on. It may well be that many places have neither of this type of requirement, but for the purpose of this discussion, residence transfers of ownership provide an example where such regulations and laws can play a role.

This is the opposite of caveat emptor. The owner is forced to inform the proposed purchaser of some conditions and details about the property, and to put it into some passable condition before the sale goes through. It may also be that the jurisdiction gives the proposed purchaser the right of inspection by experts, which is again not something that necessarily existed centuries ago.

So, in the modern era, what might be the best set of regulations for the purchase of items, not just residences, but items of transportation, communication, hygiene, or anything else? Consider the background story first. The economy of today in industrialized countries has taken advantage of the specialization of labor concept in the fullest extent, so that items manufactured are often made by giant corporations, who mass produce items for a wide market. On the other side of the transaction are individuals and households who purchase these items. There is such an immense disparity between buyer and producer/seller that the antique theories of caveat emptor are almost laughable.

In the market today, many items that are sold come with some specifications. The specifications assist a buyer to know if the item meets his needs. They often come with a warranty, meaning that a period of time has been designated during which the producer/seller still has obligations to the buyer, such as to replace the item if it fails for some limited list of reasons. But there are few regulations concerning how warranties should or must be written, nor for how long. Neither are there regulations concerning what must be included in the specifications. They can be as complete as the seller wishes to make them, and if they are only partial, the buyer can refuse the transaction.

One could say that caveat emptor has been translated into specifications and warranties. The other piece of the ancient market, where the buyer can find out the reputation of the seller or the experiences of others with whatever the seller is providing, translates today into reviews. But reviews are not mandatory and are virtually unregulated.

Why are there not clear and efficient regulations describing what sort of specifications must be provided, what type of warranty must be provided, and what types of reviews need to be accomplished before any sales of a new item are permitted? The knowledge of exactly what type of warranty were required by regulation, for example, would tend toward efficiency in the market, as everyone would know what warranty existed, how to apply for it, what costs were involved, what delays were allowable, and any other details. Having a uniform warranty for all manufactured goods would simplify manufacturing as well, as there would be clear information as to what targets to set for reliability and the various failures of reliability, such as burn-in problems, wear problems, and manufacturing faults. It might even drive more research into the problems of manufacturing items, especially newly designed items, so that they would have the required reliability and therefore only rarely invoke the warranty clauses.

It would also simplify warranty claims, as the regulations concerning them would be clear, and violations of the standardized procedures might be subject to some fine or other response to a failure to live up to the regulatory standards. Perhaps an industry would arise to handle warranty claims, as they would be much more uniform and therefore able to be processed by specialist organizations or agencies. It would also make the selection of items easier, as the longevity of any item would be that which was standardized. Reliability would no longer be a separate factor in making product comparisons.

Other aspects of the purchase of items would be similarly simplified if caveat emptor were completely relegated to the past, and a more appropriate model for sales standardized. Every simplification of life in a complex world has its own benefits, beyond the intrinsic benefits, as too much complexity is a burden for individuals to deal with. Exactly how to implement such standardization remains to be figured out.

What is Important in Economics?

There seems to be a lot of unwarranted attention in economic theories paid to what are no more than accounting schemes.

As an exercise, consider a comparison between three imaginary villages. Everything will be simplified so that the comparison won’t be confounded by extraneous factors. The villages are mostly identical as well, so comparison won’t be difficult. Let’s start by describing one of the villages; the others are the same in every factor that is mentioned. They have the same housing, the same stores, the same prices in those stores, the same transportation, the same living conditions. That’s the beauty of the example. Nothing is different between the villages except what is called out below.

There are ten identical households in a village. In each of the ten identical households there is a wage-earner, who works regular hours and brings home income, which is used by the household to purchase their necessities and some extras. Each worker in the ten households gets the same wage as the other nine, pays the same tax as the other nine, has the same debt, and the same requirements for necessities, such as shelter and food. There aren’t any significant differences between the ten.

In village 1, workers receive a hundred units of money a week. They spend ninety on necessities, save five and use five for extras.

In village 2, workers receive a hundred fifty units of money a week. They spend ninety on necessities, pay interest on their onerous debts with fifty, save five and use five for extras.

In village 3, workers receive a hundred twenty-five units of money a week. They spend ninety on necessities, pay taxes with twenty-five, save five and use five for extras.

These conditions do not change and nothing external disturbs the arrangements.

Which village is better off?

Households in village 2 have great debt and are forced to spend one third of their income on debt interest and never get a chance to pay it off.

Households in village 3 and burdened with onerous taxes which consume twenty percent of their income. They have no way to escape from these taxes.

Households in village 1 have no debts whatsoever and are fortunately free from taxation.

In this example, nothing changes, so the only way to make a comparison is to look at current conditions. There is some emotional attachment that certain people have with debt, so they would necessarily regard village 2 as worse off. Other people have a strong feeling about taxes, and would therefore regard village 3 as worse off. These are not rational reactions.

The only thing that affects the life of the people in the households in these three villages is the amount of money they have left over to spend on necessities, savings and extras. It is identical in the three villages. The three villages have exactly the same standard of living. They would not be separable if you went to the villages, looked them over, and tried to compare them. In each house you visited, life would be the same in the three villages. You could count their possessions, discuss their activities, compare their health, examine their educations, and every last one of these would be identical. You would be unable to discern any difference from any observation of their lives or their environment. The paint on their houses would be the same, the depth of the tread on any vehicles they have is the same, the trimming of their lawns is the same. The commute times are the same. The electric usage is the same. The water and sewer systems are identical.

The purpose of this example is to make the distinction between irrelevant differences and important ones. Net income is important. Whether that income is affected by debt or tax or anything else is irrelevant if the net income is the same. The level of debt is not worth noting. The percentage of taxation is irrelevant. These are simply economic accounting processes and there could be many other variations, besides the simple debt interest and taxes that subtract from gross income to make net income. They would be irrelevant as well.

Why then is there so much concern about debt and taxes, if they are only accounting labels for subtractions from gross income? Even gross income is irrelevant, except as an input into the accounting for the weekly payment to the workers. Village 2 is paid more than village 3 which is paid more than village 1, yet the higher wages mean absolutely nothing.

It may be true that there are a hundred ways to structure a debt, and economist can have some good times figuring them all out, but it means nothing in comparison to net income. Taxes can also take a hundred forms, and there can be a vast amount of clever thinking expended in arranging them. They are irrelevant in all forms. What matters is net income and how it relates to the expenses of the household.

The units of the payments are also irrelevant, as money is simply another accounting device. What matters is the purchasing power of the money, and if had a different label or unit, it would make no difference in our example.

We are not going to be able to construct a just and decent economic system if we concentrate on accounting intricacies and financial constructs. Yet that is what most economics discussion does concentrate on. To make a good economic system it is really necessary to look past these gimmicks of rearranging the distribution of economic benefits and drill down on what is important. It is the final distribution of benefits that makes the difference.

Perhaps some schemes for rearranging benefits are simpler and easier to implement than others. The simplicity or complexity of such schemes are largely irrelevant. These schemes should be regarded as only the means to accomplishing the end, which is the final distribution of income. Labelling various schemes or the details of various schemes as just or fair or real or the inverse of these attributes does absolutely nothing except obscure what economics should be concentrating on: final distributions.

Someone’s infatuation with one of these particular schemes, that is, with one of the means of determining the final distribution, should not be allowed to interfere with the assessment of the final distribution. That final distribution is what should be assessed and the design of it is what should occupy most of the thinking of an economic theory. Perhaps some of these schemes can be more easily explained, but that does not mean anything at all. Some of them might be more easily propagandized, and again, this means nothing.

The final distribution of incomes is the principal subject matter of a just deserts economic theory. There are two ways of approaching the subject, a micro and a macro approach. The micro approach answers the question of how the details of the distribution affect the recipients. Does it motivate them? Does it ring true with the actual utility provided by those receiving the benefits? The macro approach answers the question of change. How does some distribution arrangement lead to a growth in the total annual benefits production. What is the tradeoff between the diversion of benefits into savings and the growth rate of benefits?

There can also be a long discussion on the mechanisms by which savings happen. There can be mandatory rules for savings, or forced savings which happen earlier in the income stream than the receipt of the residual benefits by those they are going to. There can be various supplemental benefits for savings, or threats of future calamity if savings are not at a certain level. These make as much difference as the debt and tax levels. In other words, none at all. What matters is how much goes into savings, which is another name for capital formation.

The discussions of how savings, or capital formation, is translated into increases in productivity, also known as increases in benefits, is something that needs to be part of an economic theory. Exactly how the savings are implemented or enforced or encouraged is not a top-level consideration. What matters is the determination of what happens to productivity when savings are different levels.

After the theory finishes with both the micro approach and the macro approach, from the broadest perspective, then it might step down a notch and figure out how the few simple quantities that make up this overview might be implemented. Note here that the key word is implemented. To be precise, the word implemented does not mean anything except the generation of details to make something happen. If the overview figures out that five percent savings is right for a balance between immediate consumption and future consumption, then all the rest of the work is simply determining some accounting schemes, such as debt, taxes, withholdings, or whatever, to make that happen. Any economic theory which starts at the bottom and tries to work upward is necessarily doomed to failure. There is simply no way sets of details can be mashed together to make up a coherent theory.

Carrot and Stick in Motivation

Motivation is hard to define, and needs to be broken down into component pieces to see how Just Deserts can affect it.

Motivation is another word whose meaning or implications change with its application. Generally it means the level of emotion that propels someone to accomplish a task, but in economic systems, it means the emotional drive to produce useful things for society. A highly motivated person produces more, because of the additional attention they apply to the task, the speed at which they work, the creativity they introduce into the work, the analysis they do to ensure the task is done well, the length of time they put into it and the amount of thought about it which is generated during times when they are not focused on the task, and even more. Someone with little experience in working might not feel the same effects from motivation, and only have one or a few of the above effects happening, so the definition is vague, but it can still be used.

We do not have a measure for motivation, as it is so diverse and its effects so varied. Productivity increases with motivated workers, both at an instant in time as they work hard and faster and more accurately, but also dynamically as they offer ways to improve the task or incorporate these improved ways in their own efforts. Thus, for a given labor expense, measured in individuals employed for a fixed amount of time, more is produced and society in general has more.

Motivation also feels good to those who have it. It produces some positive emotional feedback. This is colloquially expressed in different way, for example, by saying the individual enjoys the work. They do enjoy it, meaning they feel good when they do it and better when they do it well.

One can find a variety of ways that motivation can affect an individual. One saying in our society is to wish that someone starting a career can find work they enjoy. This is somewhat different than saying some people are motivated, meaning anything they do they find motivating. The difference here is from child-rearing. One individual was complimented and praised for doing a particular thing very well, so they choose to find things to do which are analogous to it, and then their brain dredges up the former happy memories, unconsciously, and they have found work which they enjoy. Other individuals might have been complimented and praised for doing everything well, and their brain dredges up these former happy memories, unconsciously, whenever they have a task to do and they put their full attention and energy into it. Motivation is simply a reflection of some details of child-rearing.

Short of a government program for child-rearing counseling or something else to effect child-rearing among large masses of people, economic systems are stuck with dealing with what they have: a mixture of highly motivated people with generic interests, highly motivated people with specific interests, moderately motivated people within the same two divisions, and unmotivated people. It would be very fanciful to assume that people whose child-rearing positioned them in the unmotivated group could be somehow re-indoctrinated to become motivated or that somewhere there is a undiscovered and productive task area that would motivate them. Instead, the economic system needs to be constructed so it can deal with this mix of people.

This is not to say that there are not people apparently in the unmotivated bin who have simply not yet found some task with attributes which motivate them, moderately or even intensely. There needs to be some aptitude and interest testing, in a very in-depth and professional way, which helps people find what tasks that society has to offer which will strike a chord within what their child-rearing has provided them as positive handles.

There is also a negative side of these handles. A task which might otherwise be something that motivates an individual might also raise in that individual some negative feelings, which would undermine the motivation and render the positive connections impotent.

It is also not to say that some counseling or advice or therapy might not change a person from unmotivated to motivated, either by unlocking some positive associations within their mind or by dissolving or mitigating the negative ones. Both of these methods, interest testing and counseling, can change the percentage of those in the unmotivated category. But they would not eliminate it. An economic system has to be able to deal with individuals with that predilection.

There is a difference between an economic system which has to function during times of scarcity, when actual physical needs are not quite being met, and times of abundance, when they are and are even surpassed in a small or large measure. In older times, when famine struck or war destroyed resources or drought persisted or any of a slew of other problems arose, people perished. Historical records show there were such periods, and populations affected declined. While the records are incomplete in this regard, it would be reasonable to assume that motivated people and their families fared better than unmotivated ones. Perhaps it is more reasonable to assume that motivation ceased to be a problem for most people, as hunger is about as strong a motivator as can exist. This is the stick that can exist to solve the motivation problem.

In times of abundance, where society as a whole has sufficient necessities so that all can survive, this stick might or might not endure, depending on how the economic system allocates its rewards. Rewards are things that flow from their sources, which are the productive facilities of the society such as farms and factories, mines and gathering processes such as fishing, through society to the ultimate consumer. In the oldest times, this was ordered by family or village. The farming family consumed what it produced. The village divided up what was caught or produced in the village commons. After that, property rights came into vogue and partially displaced these older methods. Ownership initially became fractionated, with some sort of higher level individuals possessing some rights to the production of goods and the remainder having their own rights. The fractionation system gradually was displaced by an accounting scheme, which had many variations. Accounting led to money, which is a simpler method of accounting than having everyone keep tallies of what they owed and what they were owed.

These methods obscure the basics of what is happening in the society, and when they become the focus of an economic system, they can capture the direction of thought. Distribution methods are merely the means by which some agreed-upon allocation of production takes place. The agreement, implicit or explicit, is something that needs to be examined most carefully, and then, in a new economic system, some methods need to be determined which will implement it. These methods are important, as they may not work, given the common tendency toward corruption, greed, and criminality, but they should not be taken as the fundamental part of an economic system.

Instead, the fundamental part of an economic system is the choice of allocation. Specifically, who makes the decision about allocation, and when might it be changed? Is it done by some subset of individuals on a recurring basis, so that in each interval of time allocation can be redecided? In this situation, rules that this subset choose can be enforced by the next round of allocation. If the subset is so predisposed, productivity can be a significant factor in allocation, and this re-introduces the stick into motivational questions. People who are not motivated on the basis of their child-rearing and good fortune in finding things to do which they enjoy, might well be motivated on the basis of shortages of necessities. If the society grows too complex, there might be and probably would be an introduction of rights, which are simply part of a system of rules in a formal allocation system.

Allocation is a complex problem, and how individuals are categorized is the first step in any formal system. Is the categorization hierarchical? Does a particular region or village or family receive an allocation or is it done on an individual basis? Clearly there are limits on individual allocations based on the capability of those doing the allocation to deal with individuals, meaning to identify them, connect with them, determine the necessary information about them to implement the rules set up, and then to distribute the rewards. In a hierarchical categorization system, allocation also becomes hierarchical. If rewards are distributed on a family basis, the head of the household determines how they are divided within the family.

Levels of hierarchy work better in situations where the data available for allocation is not easily gathered and processed. But no matter what the degree of hierarchy, the question still exists of how to use the stick of motivation, if at all. Those individuals who have found their carrot, a job they enjoy, have no problem with motivation. Those who have not might be presented with the stick of a shortage of allocation. How this works, dynamically, in different types and organizations of society deserves more discussion.

What is Property Worth?

Property gains are fairly easy to incorporate in a Just Deserts economic theory, but loss scenarios require some deeper thought.

The Just Deserts economic theory, which is what is being set upon its head here, says that the rewards received by contributors to the well-being of society should be proportional to the benefits provided by them. Initially, a person was compared with other instruments that provide benefits to society, specifically to individual members or to large subsets of the membership, and it seemed likely that there could not be much of a difference in the amount of contribution. Everyone contributes within a factor of five or so from the median on the upside, and of course down to zero on the downside. It was found that the rewards to someone in a more wild west type of remuneration scheme could be hugely different from that, but it was all based on some secret that one person obtained and another person did not, or perhaps on luck.

The effort to obtain the secret could be tiny or large, depending on the method used, and could be moral or immoral, besides being legal or illegal according to whatever system of laws were in place. The idea that huge returns result from perhaps a miniscule but illegal effort are in direct contradiction to the Just Deserts core idea, that rewards are proportional to contribution, and contribution is within a small factor from effort expended, if the core idea is pursued.

So how is it possible that large rewards are obtained from property transfer, movement, and distribution? Some examples may assist in his determination.

Consider someone who buys a piece of property a distance from a city. The city grows, and after some years, the city has expanded to the vicinity of our example property. It has grown in value, greatly, and if the owner can sell it and keep the increase in valuation, he will be well-off. To clarify the example, suppose that the owner did absolutely nothing to increase the value of his property. He maintained it at some minimal level, paid taxes upon it, but nothing else. Just Rewards would imply that he has not earned the increase in property valuation that occurred, and instead, that increase belongs to the citizens of the city, who invested their time, effort, and expense on expanding the city. These citizens also supported the government with taxes, and these taxes went to expanding the radius of city services out to the example property. They did all the work necessary to increase the value of that property. The owner did nothing. But aside from some increase in taxes, if the laws allow for that, all the citizens who did the increase get nothing. They may have profited from their efforts some other way, but this example concentrates on one particular piece of property and the changes in valuation that it displays.

It seems fairly clear that a Just Deserts economic theory would have the increase in valuation go largely to the city, as a stand-in for the citizens, and little if any to the owner. This is just the opposite of the wild west rewards system. The Just Deserts theory seems to imply that within it, ownership is not total, but partial, in that someone who improves their own property through their effort, time and expense would benefit from that improvement, but someone who contributes nothing but happens to be the owner in name of a property which is improved by the efforts of others does not benefit from that windfall. In the case, probably typical in real life, where both owner improvement and city-wide expansion or improvement both are going on, some assessment is necessary of what portion of the increased value would go to the owner and what remainder would go to the city or other governmental entity which was responsible for this area. The details of this assessment might be complicated, but they do not play a great role in differentiating between a Just Deserts economic theory and other economic theories. However, there does not seem to be any other economic theory which divides the increase in value of property between a nominal owner and the regional governing entity. In a communist system, property value, increased or static, belongs to the governing entity who are representatives of the residents of that entity. In a libertarian system, property value, increased or static, belongs to the nominal owner. In contrast, in a Just Deserts economic system, the owner has the value that he paid for the property plus any amount that he contributed to the increase in value, the governing entity has the rest.

As noted before, risk is an important element in any economic theory, and there certainly is risk present in the ownership of property. If the valuation of the property goes down, is the owner the only responsible person? This would be in direct opposition to the limitation of gain that the owner faces. It is necessary to expand this question to address several scenarios. Suppose the owner did not maintain the property, and it fell into disrepair. The valuation goes down. It would appear that the owner is the only one responsible for the loss of value, and therefore the recipient of the consequent loss. Suppose instead that the city builds a nuisance next to the property, and the value goes down accordingly. In this case the governing entity has the responsibility and the loss. Suppose as a third scenario, the city for some reason starts to economically struggle, and is unable to perform the maintenance of the city infrastructure in the area near the owner’s property. It subsequently loses value. Is the city itself responsible? The owner did nothing to cause the loss. However, suppose in this third example, the entire city loses value, say for simplicity, all by the same percentage. How can the city, as the representative of all the residents, be responsible for the losses of all those who own property within the city’s jurisdiction?

If the city was to take responsibility for all these losses, what alternatives does it have? Taxing everyone to compensate all the owners does not seem reasonable; consider the case where everyone is an owner and all properties are identical and all lose identical amounts of value. There is simply no solution within the framework of the city as a whole.

Just Deserts tries to assess rewards based on contributory effort, but obviously there are many situations where this scheme does not provide any results, as in scenario three or if the gain or loss was caused by some natural event. A hurricane damages the entire city, so how is loss to be apportioned by any Just Deserts theory?

It might be better to go back to the guiding concept behind a Just Deserts economic theory, which is not based on justice or fairness, but on motivation and removing some of the ease by which corruption can occur. If there is no benefit under some variant of Just Deserts theory, there is no motivation. In a wide-spread loss situation, a good Just Deserts theory should provide some benefit, or equivalently less loss, to people who took steps to reduce their exposure to this type of loss. Thus, in any loss, there is an element of preparation through effort, time or expense, as well as a random component. What role should the random component play? Should Just Deserts act like some cooperative insurance program and seek to equalize the losses according to some metric? And then on top of this should it incentivize the non-random component, the loss-avoidance activities, by rewarding the effort?

To avoid citizens gaming the rules used for rewards during disasters, or actually during other situations as well, there must be some reward related to the actual contribution made, rather than for the effort expended in attempting to make a contribution. These are vastly different things. In a disaster loss situation, each property suffers some loss, which has a large random component. If the property owners were compensated by a fraction of their loss, less than 100%, then there would be an incentive to reduce such losses by taking preventive measures. If the loss were, instead of being relative, were absolute in value, then preventive measures would not produce any result. So it is clear that losses as well as positive benefits should be proportionate to results, but not equal to them.

Proportional is not the proper word, but proportionate in the sense of being quantitatively reasonable. There must be diminishing returns on situations like the gold prospector, where a big find produces more reward than a smaller one, but rewards do not go to the moon. Instead, they could approach an asymptote. A monstrous find would produce X amount of reward, but something one tenth as large might produce half of X. This provides incentive to seek larger finds first, but does not greatly diminish the motivation for seeking smaller ones. It also serves as a reduction of the opportunities for corruption, as huge rewards can fund corrupt mechanisms much more easily than scaled ones, which may involve rewards only a few times that of the average person rewards for the same duration of effort.

The Disparity Problem in a Nutshell

Disparity Feedback is a very strong force in almost any economic system and could destroy a Just Deserts system.

Just Deserts is an economic theory that has one interesting element: people in a Just Deserts economic system receive rewards proportional to their contribution to the system, meaning to the society as a whole. There are many problem areas with this economic theory, including: Disparity Feedback, Contribution Measurement, Motivation and Efficiency, Capital Utilization, Resource Exhaustion, Insurance, and Inter-Society Arrangements. Since this element, by itself, has some appeal, let’s discuss these problem areas looking for a means of implementing this element and the existence of possible showstoppers.

The Disparity Feedback problem is simply this. No matter how one arranges the measurement of contributions and the distribution of rewards, it is done by a mechanism that is subject to corruption of some sort. In the Wild West system of contributions and rewards, individuals are largely unfettered in what arrangements they make between themselves. This means that an individual who has accumulated, by luck or nepotism or savings or crime or any other means, a large amount of capital, can use that capital to distort the system so as to increase his/her capital. This is one version of what might be called the Wealth Feedback effect. Since wealth is measured relative to other members of the society, it is not really a wealth feedback effect, but one which runs on disparity of wealth, so a better term for it is the Disparity Feedback problem.

It simply means that disparity finds a way to increase itself. If it is a wild west market that prevails in economic exchanges, disparity serves to distort the market by some mechanism. Monopoly is one that is well-known. In the gold prospector example used previously, having a monopoly on prospecting tools, or a monopoly on gold storage, or a monopoly on transportation to the gold field or to the city that is the jumping off stage for prospecting, or any other item, means that prices can be charged far in excess of any costs. If the monopoly is maintained by covert arrangements, or outright purchase of competitors, or threats of violence or blackmail, or any other means, there is little difference. Monopoly means that one individual or group sets prices for some needed item, and can set any price they choose. This implies that there is no Just Desert reward for their effort, but instead a disparity feedback reward.

In a system where there is government control of economic transactions, holders of large disparity in wealth can find the office or agency or group in the government where rules are made for transactions, or where taxes are collected, or where licenses are granted for certain types of transactions or anything else, and use their wealth to obtain favorable conditions. This can be done by bribery, by blackmail, by threats of violence, by nepotism, or by any other means which are available to holders of a large disparity of wealth. Once again, for the particular transactions governed by this special arrangement, disparity is increased. The disparity feedback effect happens everywhere as it is solely dependent on there being a large disparity and there being some mechanism that can be found or invented, within the economic system that is in operation, which will tilt transactions to favor those who already have the large disparity. Old names for systems such as capitalism, mercantilism, communism, socialism, and more are labels for particular sets or classes of economic transactions, but none of these addresses the root problem, the disparity feedback effect. It is a universal effect, transcending any design of economic transactions.

There are some frills that economic disparity can produce. One is the economic theory frill. The holders of large economic disparity can hire writers in economic theory or novices for that matter to laud the system they are embedded it. This serves two purposes. One is the prolongation of the existence of these particular arrangements. Whatever system that is in existence that produces and amplifies the disparity over time can be described as necessary, or optimal, or justified, or anything else in favorable terms. The more such writing is broadcast, the more likely it would be that the system, whatever it is, continues to exist and continues to produce the disparity that results in this frill.

This frill is well-known, and has been described as there always being economic theorists who serve the needs of those with disparity. The rewards that can be bestowed upon economic theorists who manage to portray the existing system in a very positive light can be large, as they can be collected from all those possessing disparity in the system. They don’t necessarily have to be large, but they could be. All that is necessary is for the holders of disparity to reward those who laud the system which produces the disparity. How this could not happen is the puzzle – it appears so inevitable as to be hardly worth discussing.

Another frill is the promotion of stasis, or the avoidance of change, by other means. Whatever mechanism exists in the society for change can be subjected to the effect of disparity, so that as a society becomes more and more disparate, it should become more and more resistant to change. The mechanism by which this occurs might completely depend on the particular type of system. It could mean that threats of violence are used against anyone attempting or suggesting change could or should be made. It could mean that anyone suggesting change could be co-opted by offering of rewards for silence or retraction or misleading any listeners or other devises. It could be by the legislation of criminal penalties for acts leading or importuning to change of any significant degree.

Perhaps one of the most important frills is the degree of secrecy that is pervasive in the society. If disparity is hidden as much as possible, and the mechanisms that make it possible are also hidden, in both large and small ways, then maintaining the system which produces the disparity is easier. Fewer citizens become aware of these mechanisms and the degree to which they have produced disparity. With secrecy, much can be successfully denied. With secrecy, knowledge of the extent of the disparity and the details of the mechanisms is hard to come by and hard to verify. Any claims can be dismissed as falsehoods. Any law-breaking or immoral but legal acts committed in service of disparity can be concealed. Any theories of disparity’s effects can be pigeon-holed as simply theory without proof, as proof is hidden behind walls of secrecy.

This leads to an interesting conclusion. That excessive disparity and secrecy go hand-in-hand. One cannot exist without the other. In a system where there is strong custom for just deserts and for the prohibition of acts which will produce large disparity, such as monopoly or blackmail or threats of violence or anything similar, in short any system in a society with very high morality, secrecy does no harm but is of little use. These systems however are simply fertile ground for the introduction of breaches of these customs or morals, which is how the disparity feedback system gets started. For a few generations such morality may hold sway, but not for many, and especially not for many in situations where there is a means for disrupting that morality.

Before going too far with the concept of transparency as the antidote for disparity feedback, it should be noted that some secrecy might be necessary to implement just deserts rewards. One example jumps into view immediately. If an individual or group were working on developing some new invention, in other words, doing science or engineering towards some conclusion, such as a new product or a new theory, and their work were broadcast on a daily basis, they would be subject to competition taking advantage of the early part of their work without paying any compensation for it. So, the concept of patentable work or copyrightable work might be the only legitimate use of secrecy as far as the just deserts economic theory goes. Business deal secrecy is not the same thing. There might be some innovative concept involved in a business deal, but remember that innovative concepts are rewarded in the just deserts scheme as the time involved in developing the innovation times the hourly or monthly value of the time of the innovator or innovators. This is typically tiny in comparison to the unearned benefit achieved by some business deals. In the patentable concept situation, this reward is the whole return, so secrecy in this type of innovation is paramount to ensuring that new developments are rewarded with enough value to make the work to produce them motivating.

To summarize, the disparity feedback effect is destructive of any just deserts economic system. The details of the economic system are largely irrelevant if just deserts are used to determine the distribution of rewards. The only obvious mechanism for the elimination of the disparity feedback effect is universal transparency, with only one or perhaps a few exceptions. This can be seen as a cost or a benefit, depending on the background of the person making the judgment.

How Much is Luck Worth?

Disparity of income is self-generating. Once present, it controls individual choices, which tend to preserve it.

In discussing the value of the time of a gold prospector, operating in a situation like one of the historical gold rushes, it became clear that the most valuable component of what the gold prospector brought to the situation was his secret clues, which could have been obtained by illustrious or nefarious means. In the absence of secret clues, identical gold prospectors would achieve their results through the operation of luck, or chance. The gold prospector with the most luck might obtain a bonanza of gold, able to be exchanged for almost anything else, and the other would have a net negative return on their time, effort, and expense.

Gold prospectors might not ascribe the success of the few to luck, but might maintain it was due to diligence, persistence, hard work, acuity, or some other personal attribute. No matter how these other factors played into the result, there was a large component of luck. Similar, the obtaining of secret clues depended in part on luck as well.

Is it the essence of the Just Deserts economic policy that luck is to be compensated for, and that effort and the quality of the effort that is to be rewarded? Before considering eliminating or reducing the effect of luck on personal success, it might be good to consider its value to society as a whole.

Luck is a motivator. Motivation operates on two levels. One is to induce individuals to participate in some activity. In the gold prospector example, each prospector hopes he has the luck to find a lode of gold and achieve a bonanza of wealth and the accompanying good fortune. Those who had no belief in the possibility of their own luck would have less motivation to commit the time, effort and expenses to the task of gold prospecting. So there is a sorting process as well as a beckoning. Those who are optimistic about their own luck may need the call of the gold rush and head for that area; so also might those who are desperate.

Those who do not but could have are the ones who have some tolerable level of satisfaction with their current situation. They may not have the same utility for large amounts of money, or have a low tolerance for risk and gambling. They may have a low tolerance for the experience that is involved with the activity, which might involve very discomforting situations. They might have a low tolerance for novelty, as this activity is not anything that they were familiar with.

The ones who do go are those with some personal optimism, both that they would be successful and have the luck that was needed, but also that any potential discomforting situations will not be too bad and be tolerable, and that any novelty will not be beyond their ability to adapt and incorporate it into their lives. They also have to have a high utility for money, perhaps a quite false one, as the utility of money for satisfying physical needs is quite limited and saturates at a fairly low value. The excess utility has to arrive from psychological needs, perhaps by allowing them personal interactions, such as respect or love, that they were unable to find in other ways. This expectation of psychological benefits provides the motivation and the optimism.

This sorting process may have a very great value for society. By having a situation, like a gold rush, that makes such individuals separate themselves and undertake the mission to prospect for gold, they are found or rather find themselves, and move to the area where they can begin their quest.

Consider the alternative, which might happen in an era where there was more widespread governance and control by some central authorities. When the first report of gold comes in, the governance figures decide how many people will go and grants licenses to them, with the agreement that they would return all or most found gold to the governing body. In return they would be paid some just amount for their time and effort, and the governing body would cover the expenses.

Provided the bonus of a percentage of the found gold was not too large, the same sorting process that worked in the ‘Wild West’ type of winner-takes-all gold rush would not happen, but instead a very different one. Those who saw this as an opportunity for a higher income that what they were doing previously would be the applicants for the licenses, and essentially for the employment by the government. And this is where the second type of motivation kicks in.

Someone who is being paid for their time, with little benefit for success in the tasks they are attempting, and little expectation of such success, would soon realize that performing that task in the easiest possible way would be the best choice for them. That means the probability of success would be lower, and possibly considerably lower. If a hundred thousand gold prospector years would be necessary under the original gold rush rules to find the majority of gold in a gold rush area, perhaps two or three or four times as many would be required if the gold prospectors each had little interest in success. Perhaps ten times as many would be required. What happens is that by sorting out highly optimistic and highly motivated people by the first type of gold rush rules, the efficiency of the process is maximized. It could be said that in the society as a whole, there is a small subset of people who are willing to make a great personal sacrifice in order to have a chance at high rewards. They are optimistic about the rate of success, and that optimism, false as it may be, causes them to exert themselves to the highest level possible to obtain the rare but large reward.

What would be the effect of the bonus? If the likely bonus were small, none, and if very large, it would make the government-controlled situation almost as desirable as the uncontrolled one. What is very large? This depends on the distribution of incomes and wealth in the existing society. Images of possible futures depend upon example. In a society where there was a limited dispersion of wealth, maybe a factor of five, the bonus required would not nearly have to be so large as if there was a huge dispersion of wealth, perhaps a factor of a hundred or a thousand. Because the psychological utility is what motives the optimistic gold prospectors, rather than physical utility, the scale involved is a matter of what they have observed.

This can be restated. In a society where there is a great dispersion of income and wealth, it would be more costly for a governing body to attract and employ highly motivated gold prospectors. A larger fraction of the value of the gold they found would go to them. In a society where there was only a limited dispersion of wealth and income, the costs would be less, and the governing body would receive more. This could be spent, in a situation where the governance was not so corrupt as to divert most of the receipts of the gold prospecting to the benefit of those in the government or their external associates, there would be more gold and therefore more money available to spend on the goals of the government, such as infrastructure, research support, charity, and defense, or equivalently, less taxes would be levied as the gold income would displace some of that.

The value of luck in a situation where there is governance with extensive control can be much less, in absolute terms, if the society in which it is embedded has few or no examples of very disparate incomes or wealth. This is a peculiarity of how a certain group of individuals, those who are highly optimistic and highly motivated, render their psychological utility. Once they have been impressed by examples of extreme disparity, that becomes the goal, and then the costs to direct them to some task where luck plays a large role becomes much greater, by the same measures as the disparity.

There would be a distribution among this set of highly motivated, highly optimistic individuals, and even in a situation of high disparity, there might be some who would be attracted by a much lower return on their effort. How many depends on some difficult-to-determine factors in the society. This does not change the basic result, that individuals, who think they have a lot of luck and are highly motivated to find opportunities to exploit that situation and turn their position in society from one in the lower levels to one in the higher levels, would need to be rewarded in most cases by something commensurate with the difference between these lower levels and the higher ones.

Time doesn’t play too much of a role here, as once the example is set, if society changes toward a lower disparity, the psychological utility of the individuals who might be motivated to take large risks would not immediately change. Perhaps over a long time, it might, or there might have to be a generational effect. This could be thought of as another feedback effect, where high levels of disparity lead to mechanisms, such as something analogous to gold prospecting, which would tend to keep them that high or raise them higher.